In a highly unusual case, the Tax Court of Canada was asked to decide whether a multi-million dollar trip to outer space was a taxable benefit or a business expense.
The case stems from a trip taken by Quebec billionaire and Cirque du Soleil co-founder Guy Laliberté. In 2009, Laliberté took a trip to space at a cost of $41.8 million. The trip lasted 12 days and took him to the International Space Station.
As part of this trip, Laliberté appeared via live broadcast video link in a series of fundraising benefit concerts and entertainment events at venues in 14 cities around the world. The benefit fundraiser was for One Drop Foundation, a charity in support of the availability of clean pure water that is associated with Cirque du Soleil. Many celebrities also participated in the events, including Al Gore, David Suzuki and Maude Barlow, as well as some Cirque du Soleil performers. A documentary and a book of photographs were also produced as part of the fundraising event and for business promotional purposes.
After the trip was completed, and paid for by Laliberté’s holding company, it was charged to the top operating company in the Cirque du Soleil group. That company then deducted the $41.8 million cost of the trip, less a $4 million shareholder benefit reported by Laliberté, for financial accounting purposes. It did not deduct any of this amount for tax purposes in Canada or elsewhere, nor did any other company. Essentially, Laliberté was reimbursed for the trip as a business expense.
The Canada Revenue Agency determined that the $41.8 million should have been claimed by Laliberté as a taxable benefit, while he argued that his personal participation in the events was a stunt marketing event and the entire amount should therefore be deductible to Cirque du Soleil Group as a marketing or promotional expense, and that there was no shareholder benefit to himself. Additionally, he argued that as a result of the trip, Cirque du Soleil received unpaid, earned media from his trip which exceeded the cost of the trip and was therefore a business expense.
At issue was whether the cost of the trip was a taxable benefit and sections 15(1) and 246(1) of the Income Tax Act. A taxable benefit is a payment that is considered a positive benefit to the individual and can be in the form of cash or other type of payment. Such benefits must be reported when an individual files their personal income taxes and will be subject to taxation.
At the outset, the judge stated:
I find that the motivating, essential and overwhelmingly primary purpose of the travel was personal. I find that [Laliberté] is the person who made the decision to travel on his space trip and that his overarching reasons for that decision were personal.
The judge then proceeded to list 27 reasons for this finding, which included Laliberté’s long-held personal desire to go into space, the fact that no other Cirque du Soleil representative was considered for the trip, and that there was no evidence of any reasonably expected value to Cirque du Soleil before the trip was taken.
After reviewing all the facts, the judge determined that the majority of the cost of the trip was a taxable benefit. He fixed the amount of the business-related portion of the cost at 10 per cent, or $4.2 million, for the direct incremental costs of the promotional activities of Cirque du Soleil and the One Drop Foundation. Ninety per cent of the cost, or $37.6 million, was fixed as the amount of the taxable benefit to be assumed by Laliberté.
In conclusion, the judge stated:
Simply put, there is a difference between a business trip which involves or includes personal enjoyment aspects, and a personal trip with business aspects, even significant ones, tacked on. I have found that this space trip falls into the latter category, and the tax consequences to the business income are considered and determined accordingly.
While this case did not present any novel legal issues, it does provide an interesting example of what can go wrong when a benefit is not properly claimed or is incorrectly claimed as a business expense. Whether or not a benefit is taxable depends on whether the person receives an economic advantage that can be measured in money, and whether that individual is the primary beneficiary of the benefit. As this case proves, the tax consequences of improperly categorizing a benefit can be significant.
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